Full Cost

Definition: The Full Cost is the total cost incurred in production and is comprised of business cost, opportunity cost, and normal profit.

The business cost is the overall cost incurred to carry out the business operations. While the opportunity cost is the returns expected from the second best use of the scarce resources. The normal profit is the minimum earning that the firm must earn in addition to the opportunity cost to remain in its present occupation.

Many a times, the accountants refer full cost as the total manufacturing or production cost of a product. This includes the cost of materials, labor, fixed and variable manufacturing overheads. But, however, the accountants do not include administrative, selling and interest cost in their definition of full cost. This is because they are very clear with their notion that the inventory and cost of goods sold are recorded in the financial statements of the company.

While the other set of accountants considers the term full cost to be more than just the overall manufacturing or production cost of a product. According to them, the full cost includes the manufacturing cost plus the proportion of selling, administration and interest cost.

In addition to the manufacturing cost, the proportion of administrative and selling cost is also included because there are certain products which require more of these indirect expenses for their production while other products require the smaller proportion of these expenses. By combining the administration cost with the manufacturing cost of a product helps in determining whether the selling cost of the product is in complete alliance with its full cost or not.